Minnesota Reverses Its Position: Sales of Optional Maintenance Contracts Are Subject to Sales Tax

Monday, December 10th, 2012


The Minnesota Department of Revenue (DOR) has released a new revenue notice explaining that it has reversed its position and now views optional maintenance contracts as subject to sales tax. Minn. Revenue Notice No. 12-12 (Dept. of Revenue Nov. 26, 2012).

Prior to this notice, the DOR's long-standing position had been that sales of both optional maintenance contracts and optional warranty contracts were not subject to tax. But, the DOR has re-considered and changed that position. Now, the DOR considers sales of optional maintenance agreements to be taxable, while optional warranty contracts continue to be not subject to sales tax.

To explain its change in position, the DOR clarified the distinction between a maintenance contract and a warranty contract. The DOR defined a maintenance contract as "a contract under which the specific repair and replacement parts and consumable items needed to maintain the equipment are provided at no additional cost . . . and the taxable items provided under the contract are more than de minimis compared to the cost of the contract." By contrast, the DOR described warranty contracts as acting like "insurance against future unexpected repair costs," so "neither the customer nor the seller knows at the time the contract is signed whether anything will be provided under the contract."

The DOR reasoned that maintenance agreements are bundled transactions because they combine more than one easily distinguished products such as repair labor, general services (like cleaning or inspection), replacement parts, and consumable items. The DOR determined that the cost of repair parts and consumable supplies, which are used in rendering the combined services, cannot be considered insignificant. Therefore, as bundled transactions, such maintenance agreements are subject to tax.

In sum, Minnesota taxes sales of equipment maintenance agreements that provide repair and replacement parts and consumable items at no additional cost, while warranty contracts that cover future unexpected repair costs and do not include consumable items needed to maintain the equipment are not subject to sales tax in Minnesota.

Also, this change in interpretation does not affect optional software maintenance contracts, which are governed by specific provisions in Minnesota's sales and use tax regulations. See Minn. R. 8130.9910, subpart. 2. Furthermore, the DOR also updated the section in its revenue notice for the printing industry that addresses sales of maintenance contracts. Minn. Revenue Notice No. 93-03 (Dept. of Revenue rev. Nov. 26, 2012).

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